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California employer successful in arbitration policy dispute

Serafin v. Balco Properties Ltd., LLC, No. A141358 (March 16, 2015): The California Court of Appeal for the First Appellate District recently upheld an arbitration award in favor of an employer despite the employee’s arguments that (1) she never entered into a binding agreement to arbitrate her employment-related claims and, in the alternative, that (2) the agreement was unconscionable.

Madeline Serafin worked as director of property management for Balco Properties LTD., LLC, an affiliate of Bay Alarm. During her first days of work, she executed a two-page arbitration agreement, entitled “MANDATORY ARBITRATION POLICY.” The policy stated the following in relevant part:

In the event of a disagreement or dispute between an employee and Bay Alarm, or any of its owners, manager, or other employees, arising out of or connected with his or her employment with Bay Alarm, it is the policy of Bay Alarm that the disputed matter shall be submitted to binding arbitration under the Rules of the American Arbitration Association applicable to employment disputes. All employees will be required to sign an acknowledgment stating that they understand this policy and will comply with it.

Below the words “I have read and understand this policy,” at the end of the agreement, Serafin signed the agreement next to the date July 29, 2009.

Balco terminated Serafin’s employment on May 17, 2010, and submitted a demand to the American Arbitration Association (AAA) to arbitrate a conversion claim against Serafin for return of $10,798.08, which allegedly represented an overpayment of wages, as well as Serafin’s employment-related claims (which at this point were part of a civil complaint that had not yet been filed in court). The parties selected an arbitrator, and Serafin subsequently filed her lawsuit in Contra Costa County Superior Court. While the arbitration was pending, the trial court stayed the state court proceedings until the parties completed arbitration.

On June 28, 2013, following a six-day arbitration hearing, the arbitrator issued a 59-page “Arbitration Decision and Award” finding in Balco’s favor on all of Serafin’s employment-related claims as well determining that Balco was entitled to return of the overpayment to Serafin.

The trial court affirmed the decision and award and entered judgment in favor of Balco on January 15, 2015. Serafin filed an appeal claiming that the trial court erred in ordering the case to arbitration.

The Court of Appeal rejected Serafin’s argument that she never consented to arbitration, noting that the agreement was in its own two-page, easy-to-read document, separate from any other document that Serafin was required to execute. The court further noted that the top of the agreement stated “MANDATORY ARBITRATION POLICY” in capitalized lettering. The language of the agreement also supported its validity stating “Any and all claims arising out of or in any way connected with your employment with Bay Alarm must be submitted to binding arbitration.” It further stated “All employees will be required to sign an acknowledgment stating that they understand this policy and will comply with it.”

The court also relied on the declaration of the former HR generalist for Bay Alarm and Balco who stated that she gave the agreement to Serafin and her general practice was to explain each document and answer any questions. Serafin even signed the document in her presence. Rather than attempt to hide the arbitration agreement, the court reasoned, Balco made “every effort” to call Serafin’s attention to the arbitration policy she was agreeing to at the time she signed the acknowledgment.

The court, relying on 24 Hour Fitness, Inc. v. Superior Court, also rejected Serafin’s argument that the agreement was illusory because Balco could “modify, revoke or change its [Mandatory Arbitration] Policy at any time.” In 24 Hour Fitness, Inc., the court held that a modification provision does not render the contract illusory because the power to modify the terms of the employment agreement “indisputably carries with it the duty to exercise that right fairly and in good faith.” Applying this holding to the case, the Court of Appeal held that Balco’s ability to modify the terms of the agreement alone did not render it illusory.

Serafin’s next argument that nothing indicated Balco intended to be bound by the arbitration agreement lacked merit as well. The court held that Balco’s lack of signature on the agreement itself did not matter because the company’s conduct implied ratification. Here, Balco’s conduct showed its ratification of the agreement because Balco authored the agreement, printed it on Bay Alarm’s letterhead, invoked the arbitration process, and filed a motion to stay the state court proceedings and to compel arbitration. Reasoning that Balco had at all times performed the duties required of it under the arbitration agreement, the court held that Balco carried its burden of proving the agreement was mutually binding.

Losing the binding agreement argument, Serafin next argued that in any event, the agreement was both procedurally and substantively unconscionable. The court applied the sliding scale approach to these arguments noting that “the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusions that the term is unenforceable, and vice versa.”

As to Serafin’s procedural unconscionability argument, she first argued that the arbitration agreement was unconscionable because it was presented on a “take-it-or-leave it basis.” The court found that such unconscionability was “limited,” however, because the arbitration provisions were highlighted for her in the two-page, freestanding document relating solely to arbitration, that she received and signed.

Serafin also argued that the agreement was procedurally unconscionable because she failed to attach a copy of the rules citing Trividi v. Curexo Technology Corp. The court distinguished that case noting that in addition to failing to attach the arbitration rules, the agreement at issue in Trivedi was never discussed or explained to the employee. By contrast, the arbitration agreement here stated that Serafin could obtain a copy of the rules from the HR department or directly from AAA. In addition, Serafin signed the agreement in the presence of an HR representative who was available specifically to explain the document and answer any questions. Thus, the court held, Serafin showed only a minimal amount of procedural unconscionability.

Moving on to substantive unconscionability, Serafin then argued that the language of the agreement was unconscionable because it provides for arbitration of claims “includ[ing], but . . . not limited to” discrimination, harassment, wrongful termination, and defamation. However, rather than simply interpreting that language to apply only to the employee, the court interpreted that language as applying to both parties. The court also rejected Serafin’s argument that the agreement did not create an obligation for Balco to arbitrate any employment-related claims since the company was the party that initiated arbitration.

Serafin next argued that the agreement was substantively unconscionable because the parties themselves would have to bear the costs of arbitration, including witness and attorneys’ fees. The attorneys’ fees provision, Serafin argued, ran contrary to California’s Fair Employment and Housing Act (FEHA) because it would wipe out her potential right to attorneys’ fees. The court agreed that such a provision was unconscionable, but it had no impact on Serafin’s rights because the trial court severed the unconscionable attorneys’ fees and cost provision from the arbitration agreement early in the proceedings.

Finally, the court rejected Serafin’s argument that the arbitration agreement “improperly denied her right to judicial review” because the agreement provided that the decision of the arbitrator would be “final and binding.” Despite such language, the court held that it did not bar judicial review of an arbitration award pursuant to Code of Civil Procedure sections 1286.2 and 1286.6.

Applying the sliding scale approach, the Court of Appeal found little procedural unconscionability and little substantive unconscionability since the attorneys’ fees provision had been severed by the trial court. Therefore, the court held that the trial court did not err in compelling Serafin to arbitrate her employment-related claims against Balco.

Practical Impact

Balco emphasizes the importance of carefully drafting arbitration agreements in order to be enforceable. Employers should take the following steps:

Create a separate arbitration agreement with its own separate acknowledgment form independent of the employee handbook.

Use clear language that is in bold and capitalized font at the very beginning of the agreement indicating that the document is a mandatory arbitration agreement.

Include specific language in the acknowledgment stating “I have read and understand this policy” or something similar.

Have an existing employee (preferably in HR) explain the document to the employee, be available for any questions, and ensure that the document is signed by the employee in his or her presence.

Do not include language stating that costs will be the responsibility of each party.

Arbitration agreements may not be enforceable 100 percent of the time, but these steps can certainly help.

According to Rafael G. Nendel-Flores, a shareholder in the Orange County office of Ogletree Deakins, “The Serafindecision highlights that, when arbitration agreements are drafted and implemented properly, most California courts will readily enforce them. This decision also is indicative of a continuing trend by the plaintiffs’ bar to challenge contract formation issues in addition to challenging the language of the arbitration agreement itself. It is critical that employers properly manage how arbitration agreements are presented to employees. It is not enough simply to have enforceable arbitration language. For example, arbitration should be presented in a stand-alone agreement rather than in a larger agreement/policy document that addresses other non-arbitration issues.”